¶ … small size business owner has to continually assess the status of the enterprise relative to both itself (as evolution in time), as well a relative to the industry, in order to identify its current status and position. One important means in which the economic agents come to conduct this assessment is represented by the financial status of the company, revealed through the lenses of financial ratios. Some notable examples of financial rations to be considered by small size economic agents in their assessments include: Liquidity ratios, such as the quick ratio or the current ratio, which assess the company's ability to pay its debts

Asset turnover ratios, such as the receivable turnover or the inventory turnover, which assess the company's ability to use its assets to generate revenues

Financial leverage ratios, such as the debt to equity ratio, which indicate the status of the company's capitals

Profitability ratios, such as the gross profit margin, the return on assets or the return on equity, which indicate the ability of the firm to use is resources to generate profits (Net MBA, 2010).

Aside from these ratios, larger size companies would also focus on the dividend policy ratios, such as the dividend yield or the payout ratio, which assess the company's use of equity and its repayment, as well as future (Net MBA, 2010). The ratios used by the small and larger size companies are virtually the same, with the difference that a larger size company will be interested in market power and competitiveness and will compare the ratios with those of the industry, whereas a small size entity will be focused on its evolution through time and would compare the ratios from one year to the other.

2. Debt financing

Upon the enlargement of the capitals, the economic agent has the option of borrowed capitals vs. equity financing, with each of these revealing both advantages as well as disadvantages. At the level of debt financing, this has the main disadvantage of requiring collateral and other guarantees as solicited by the bank; then, it necessitates sustained and regular payments,...

Debt financing nevertheless is computed as money owed by the firm and the principal and interest rate are not subjected to taxes. Additionally, the bank does not intervene in the decision making process at the firm.
Equity financing is also a viable option as it allows repayment of the borrowed funds only when the firm is profitable, but it has the disadvantage of the stock holders' interference within the firm and the computation of the dividend payments as profits, and their subsequent taxation. Still, in the detriment of bonds, stocks are more flexible as they do not establish a strict schedule for repayment and they can also prove more profitable (Russell Investments).

3. Financial returns and risks

The relationship between risks and tradeoff is a very close one, impacting virtually every aspect of investments. In a most rudimentary formulation, there is a direct relationship between the two, in the meaning that a modification in one dimension of investments will be correlated with a similar modification in the other dimension. More specifically:

High levels of expected return are generally correlated with higher degrees of risk

Lower levels of expected return are correlated with lower levels of risk.

In other words, investors who wish to register higher returns will have to accept a higher degree of risk, whereas investors who do not wish to assume higher degrees of risk, will have to accept lower levels of financial returns. In essence, it is important for the investors to find their own balance and to make investments based on their own threshold for risk.

4. Beta

In the same line of investment discussions, it is important for investors and prospective investors to also understand the concept of beta. In a generic formulation, the beta of a stock or an investment portfolio represents the risk associated with the respective investment instrument, relative to the overall market, or relative to another instrument selected as benchmark. The beta instrument is used in the assessment of the future return of…